(a) Whether there is a client error. Many times the confirmation response differences are due to timing differences for deposits in the mail and inventory in transit to the customer. Sometimes customers misunderstand the confirmation or the information requested. The auditor must distinguish between those and client errors. (b) The amount of the client error if any. (c) The cause of the error. It would be intentional, a misunderstanding of the proper way to record a transaction, or a breakdown of internal control. (d) Potential errors in the sample not tested. The auditor must estimate the error in the untested population, based on the results of the tests of the sample. Suggested steps to clear each of the comments satisfactorily are: 1. (a) Examine supporting documents, including the sales invoices and applicable sales and shipping orders, for propriety and valuation of the sales. (b) Review the cash receipts books for the period after December 31, 2005, and note any collections from the PDQ Company. The degree of internal control over cash receipts should be an important consideration in determining the reliance that can be placed on the cash receipts entries. In addition, as there is no assurance that collections after December 31 represent the payment of invoices supporting the December 31 trial balance, consideration should be given to requesting a confirmation from the PDQ Company of the invoices paid by their checks. 2. (a) The cause should be investigated thoroughly. If the credit was posted to the wrong account, it may indicate merely a clerical error. On the other hand, posting to the wrong account may indicate lapping. (b) Such a comment may also indicate a delay in posting and depositing of receipts. If upon investigation such is the case, the company should be informed immediately so that it can take corrective steps.
8-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition 3. This is a confirmation of the balance with an additional comment. Since the customer has given us the data, it is preferable to check to see that the information agrees with the company’s records. Such a procedure may disclose misposting or delay in recording receipts. 4. This incomplete comment should raise an immediate question: does the customer mean paid before or paid after December 31? Because the customer’s intent is unknown, this account should be reconfirmed and the customer asked to state the exact date. Upon receipt of the second confirmation, the information thereon should be traced to the cash receipts book. 5. The auditor should first evaluate how long it takes to ship goods to the customer in question. If it ordinarily takes more than five days, there is no indication of error. A comment of this type may indicate that the company may be recording sales before an actual sale has taken place. The auditor should examine the invoice and review with the appropriate officials the company’s policies.
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